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SECURITIES AND EXCHANGE COMMISSION
File No.* SR - 2015 - * 03
WASHINGTON, D.C. 20549
Amendment No. (req. for Amendments *) 2
Form 19b-4
Page 1 of * 33
Filing by
Municipal Securities Rulemaking Board
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
Initial *
Amendment *
Withdrawal
Section 19(b)(2) *
Section 19(b)(3)(A) *
Section 19(b)(3)(B) *
Rule
Extension of Time Period
for Commission Action *
Pilot
19b-4(f)(1)
Date Expires *
19b-4(f)(5)
19b-4(f)(3)
19b-4(f)(6)
Notice of proposed change pursuant to the Payment, Clearing, and Settlement Act of 2010
Section 806(e)(1) *
Security-Based Swap Submission pursuant
to the Securities Exchange Act of 1934
Section 806(e)(2) *
Exhibit 2 Sent As Paper Document
19b-4(f)(4)
19b-4(f)(2)
Section 3C(b)(2) *
Exhibit 3 Sent As Paper Document
Description
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Contact Information
Provide the name, telephone number, and e-mail address of the person on the staff of the self-regulatory organization
prepared to respond to questions and comments on the action.
First Name * Michael
Last Name * Post
Title *
General Counsel - Regulatory Affairs
E-mail *
mpost@msrb.org
Telephone * (703) 797-6600
Fax
(703) 797-6700
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
Municipal Securities Rulemaking Board
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
(Title *)
Corporate Secretary
Date 11/09/2015
By
Ronald W. Smith
(Name *)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For complete Form 19b-4 instructions please refer to the EFFS website.
Form 19b-4 Information *
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Exhibit 1 - Notice of Proposed Rule Change *
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Exhibit 1A- Notice of Proposed Rule
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The self-regulatory organization must provide all required information, presented in a
clear and comprehensible manner, to enable the public to provide meaningful
comment on the proposal and for the Commission to determine whether the proposal
is consistent with the Act and applicable rules and regulations under the Act.
The Notice section of this Form 19b-4 must comply with the guidelines for publication
in the Federal Register as well as any requirements for electronic filing as published
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
guidance on Federal Register publication requirements in the Federal Register
Document Drafting Handbook, October 1998 Revision. For example, all references to
the federal securities laws must include the corresponding cite to the United States
Code in a footnote. All references to SEC rules must include the corresponding cite
to the Code of Federal Regulations in a footnote. All references to Securities
Exchange Act Releases must include the release number, release date, Federal
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
-xx-xx). A material failure to comply with these guidelines will result in the proposed
rule change being deemed not properly filed. See also Rule 0-3 under the Act (17
CFR 240.0-3)
The Notice section of this Form 19b-4 must comply with the guidelines for publication
in the Federal Register as well as any requirements for electronic filing as published
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
guidance on Federal Register publication requirements in the Federal Register
Document Drafting Handbook, October 1998 Revision. For example, all references to
the federal securities laws must include the corresponding cite to the United States
Code in a footnote. All references to SEC rules must include the corresponding cite
to the Code of Federal Regulations in a footnote. All references to Securities
Exchange Act Releases must include the release number, release date, Federal
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
-xx-xx). A material failure to comply with these guidelines will result in the proposed
rule change, security-based swap submission, or advance notice being deemed not
properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)
Copies of notices, written comments, transcripts, other communications. If such
documents cannot be filed electronically in accordance with Instruction F, they shall be
filed in accordance with Instruction G.
Exhibit Sent As Paper Document
Exhibit 3 - Form, Report, or Questionnaire
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proposes to use to help implement or operate the proposed rule change, or that is
referred to by the proposed rule change.
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Exhibit 5 - Proposed Rule Text
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The full text shall be marked, in any convenient manner, to indicate additions to and
deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit
the staff to identify immediately the changes made from the text of the rule with which
it has been working.
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes
to rule text in place of providing it in Item I and which may otherwise be more easily
readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part
of the proposed rule change.
If the self-regulatory organization is amending only part of the text of a lengthy
proposed rule change, it may, with the Commission's permission, file only those
portions of the text of the proposed rule change in which changes are being made if
the filing (i.e. partial amendment) is clearly understandable on its face. Such partial
amendment shall be clearly identified and marked to show deletions and additions.
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Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934
(“Act” or “Exchange Act”)1 and Rule 19b-4 thereunder,2 the Municipal Securities Rulemaking
Board (“MSRB”) is filing with the Securities and Exchange Commission (“SEC” or
“Commission”) a second partial amendment (“Amendment No. 2”) to File No. SR-MSRB-201503, a proposed rule change consisting of proposed new Rule G-42, on duties of non-solicitor
municipal advisors (“Proposed Rule G-42” or “proposed rule”), and related proposed
amendments to Rule G-8, on books and records to be made by brokers, dealers, municipal
securities dealers, and municipal advisors. Proposed Rule G-42 would establish core standards of
conduct and duties of non-solicitor municipal advisors when engaging in municipal advisory
activities. Amendment No. 2 adds, in response to comments received by the Commission, a
narrow exception to the specified prohibition in Proposed Rule G-42 of certain principal
transactions with municipal entity clients, and also makes minor, technical amendments.
Background
On April 24, 2015, the MSRB filed with the SEC File No. SR-MSRB-2015-03.3 On
August 6, 2015, the Commission issued an order instituting proceedings to determine whether to
approve or disapprove the proposed rule change (“OIP”).4 On August 12, 2015, the MSRB filed
with the Commission partial Amendment No. 1 to File No. SR-MSRB-2015-03,5 and submitted a
letter responding to the comments that were received by the Commission regarding the proposed
rule change.6 In response to the OIP or Amendment No. 1, the Commission received a total of
thirteen additional comment letters.7
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b-4.
3
File No. SR-MSRB-2015-03 was published in the Federal Register for notice and
comment on May 8, 2015. See Exchange Act Release No. 74860 (May 4, 2015), 80 FR
26752 (May 8, 2015). The Commission received fifteen comment letters in response to
the notice of the proposed rule change.
4
The OIP was published in the Federal Register for notice and comment on August 12,
2015. See Exchange Act Release No. 75628 (August 6, 2015), 80 FR 48355 (August 12,
2015).
5
Amendment No. 1 was published for notice and comment on August 25, 2015. See
Exchange Act Release No. 75737 (August 19, 2015), 80 FR 51645 (August 25, 2015).
6
Letter to Secretary, SEC, from Michael L. Post, General Counsel – Regulatory Affairs,
Municipal Securities Rulemaking Board, Response to Comments on File No. SR-MSRB2015-03, dated August 12, 2015, available at: http://www.sec.gov/comments/sr-msrb2015-03/msrb201503.shtml (“first response to comments”).
7
Letters from Michael Nicholas, Chief Executive Officer, Bond Dealers of America
(“BDA”), dated September 11, 2015 and November 4, 2015; John C. Melton, Sr.,
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The MSRB is filing this second partial amendment (“Amendment No. 2”) primarily to
add paragraphs .14 and .15 of the Supplementary Material to Proposed Rule G-42. Proposed
paragraph .14 would provide a narrow exception (“Exception”) to the proposed prohibition on
certain principal transactions in Proposed Rule G-42(e)(ii) for transactions in specified types of
fixed income securities. Proposed paragraph .15 would define those types of fixed income
securities. Amendment No. 2 also makes five minor technical changes to clarify or renumber
proposed rule text.8
The MSRB requests that the proposed rule change be approved with an effective date six
months after Commission approval of all changes.
Amendments
Exception to Proposed Prohibition of Certain Principal Transactions
Proposed Rule G-42 would establish core standards of conduct and duties of non-solicitor
municipal advisors when engaging in municipal advisory activities. Proposed Rule G-42(a)(ii),
consistent with the Exchange Act,9 provides that a municipal advisor, in the conduct of all
municipal advisory activities for a municipal entity client, is subject to a fiduciary duty that
includes a duty of loyalty and a duty of care. Under proposed paragraph .02 of the
Executive Vice President, Coastal Securities (“Coastal Securities”), dated September 11,
2015; Jeff White, Principal, Columbia Capital Management, LLC (“Columbia Capital”),
dated September 10, 2015; Joshua Cooperman, Cooperman Associates (“Cooperman”),
dated September 9, 2015; David T. Bellaire, Executive Vice President & General
Counsel, Financial Services Institute (“FSI”), dated September 11, 2015; Dustin
McDonald, Director, Federal Liaison Center, Government Finance Officers Association
(“GFOA”), dated September 14, 2015; Tamara K. Salmon, Associate General Counsel,
Investment Company Institute (“ICI”), dated September 11, 2015; Lindsey K. Bell,
Millar Jiles, LLP (“Millar Jiles”), dated September 11, 2015; Terri Heaton, President,
National Association of Municipal Advisors (“NAMA”), dated September 11, 2015;
Leslie M. Norwood, Managing Director and Associate General Counsel, Securities
Industry and Financial Markets Association (“SIFMA”), dated September 11, 2015; Joy
A. Howard, WM Financial Strategies (“WM Financial”), dated September 11, 2015; W.
David Hemingway, Executive Vice President, Zions First National Bank (“Zions”), dated
September 10, 2015.
8
The MSRB will address issues raised in the comment letters received in response to the
OIP or Amendment No. 1 that are not addressed through this Amendment No. 2
concurrently with its response to comment letters received, if any, in response to this
Amendment No. 2.
9
See Section 15B(c)(1) of the Exchange Act (15 U.S.C. 78o-4(c)(1)).
5 of 33
Supplementary Material to Proposed Rule G-42, the duty of loyalty requires, among other things,
a municipal advisor to act in the municipal entity client’s best interest without regard to the
financial or other interests of the municipal advisor. In light of this fiduciary duty, and to prevent
acts, practices or courses of business inconsistent with this duty, Proposed Rule G-42(e)(ii)
would prohibit a municipal advisor, and any affiliate of such municipal advisor, from engaging
with its municipal entity client in a principal transaction that is the same, or directly related to
the, municipal securities transaction or municipal financial product as to which the municipal
advisor is providing or has provided advice to the municipal entity client (“principal transaction
ban” or “ban”).
The comment letters in response to the OIP or Amendment No. 1 that addressed the
principal transaction ban generally expressed concerns about the breadth of the ban and the lack
of any exception. They noted that fiduciaries governed by other regulatory regimes, such as
investment advisers under the Investment Advisers Act of 1940 (“Advisers Act”),10 are not flatly
prohibited from engaging in principal transactions with their clients if proper disclosures are
made and consent is obtained. Several commenters, including GFOA, FSI, SIFMA and BDA,
generally urged the inclusion of an exception in cases, at a minimum, where the advice provided
is in connection with the execution of a securities transaction by the municipal advisor on behalf
of the municipal entity, the principal transaction is in a fixed income security, and the municipal
entity client is involved in the process for the management of the relevant conflicts of interest.
GFOA expressed concerns that the ban “could force small governments to open a more
expensive fee-based arrangement with an outside advisor in order to receive this very limited
type of advice on investments that are not considered to be risky.”11 Several other commenters,
including BDA, FSI, Millar Jiles, SIFMA and Zions, commented on the importance of
preserving a municipal entity’s choices and access to services and products at favorable prices,
preserving choices regarding financial advisors with whom they had relationships of trust, and
avoiding increased costs to municipal entities.
Prior to the most recent set of comments, the MSRB consistently concluded that the
principal transaction ban should be retained with the breadth as proposed. After carefully
considering the additional comments, including those of GFOA, generally representative of a key
class of entities that Proposed Rule G-42 is intended to protect, the MSRB has determined to
incorporate the Exception into Proposed Rule G-42. The MSRB believes that the Exception will
address the primary concerns expressed by commenters that, without an exception for
transactions in certain fixed income securities when advice is given by the municipal advisor in
connection with executing such transactions, the proposed ban would restrict the access of
municipal entities to trusted financial advisors, limit their ability to obtain certain financial
services and products, create undue burdens on competition, and impose unjustified costs for
issuers.
10
15 U.S.C. 80b-1 et seq.
11
GFOA, however, acknowledged that the ban would be appropriate in the context of a
traditional financial advisor.
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Significantly, the MSRB has developed Proposed Rule G-42 as a cornerstone of a
regulatory framework that recognizes and is tailored to the unique characteristics of the
municipal securities market, the special responsibilities of municipal entities in their financial
matters and in their relationship to their constituents, and the particular role that municipal
advisors play in the municipal securities market. The design of the proposed rule, as amended by
Amendment No. 2, is in recognition that municipal advisors serve a diverse array of clients, and,
in particular, municipal entity clients, which range from large state issuers to small school
districts, special districts and other instrumentalities, public pension plans, and collective
vehicles, such as local government investment pools (“LGIPs”) and college savings plans that
comply with Section 529 of the Internal Revenue Code.12 The design of the proposed rule is also
in recognition that municipal entity clients may have special needs of access to a range of
services and particular types financial products from municipal advisors and affiliated financial
intermediaries. At the same time, the MSRB believes that the proposed rule change, as amended,
will further the protection of municipal entities, investors and the public interest.
Description. The Exception, to be incorporated as new proposed paragraph .14 of the
Supplementary Material to Proposed Rule G-42, would provide a municipal advisor two options
by which it might engage in certain principal transactions with a municipal entity client,
provided the municipal advisor also complies with the first three requirements set forth in
paragraph .14 (organized as sections (a) through (c)). A municipal advisor would have the option
to act, on a transaction-by-transaction basis, in accordance with a short set of procedural
requirements, some of which are drawn from and similar to the requirements set forth in
Advisers Act Section 206(3).13 Alternatively, a municipal advisor that wishes to satisfy
procedural requirements on other than a transaction-by-transaction basis would be subject to
more and different procedural requirements, including obtaining from the municipal entity client
a prospective blanket, written consent. These procedural requirements are drawn from and
similar to those set forth in Advisers Act Rule 206(3)-3T.14
Importantly, the Exception would operate only to take certain conduct out of the specified
prohibition on certain principal transactions in proposed Rule G-42(e)(ii). It would not provide a
safe harbor from complying with any other applicable law or rules. Thus, a municipal advisor
engaging in a principal transaction in compliance with the Exception would need to continue to
be mindful of, and comply with, its broader and foundational obligations owed to the client as a
fiduciary under the Exchange Act and Proposed Rule G-42, as well as all other applicable
provisions of the federal securities laws and state law.15
12
See 26 U.S.C. 529.
13
15 U.S.C.80b-6(3).
14
17 CFR 275.206(3)-3T.
15
The MSRB’s approach in this regard is consistent with that of the Commission with
respect to principal transactions executed by investment advisers under Advisers Act
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All of the requirements for the Exception take the form of various conditions and
limitations. As provided in proposed section (a) of paragraph .14 of the Supplementary Material,
a principal transaction could be excepted from the specified prohibition only if the municipal
advisor also is a broker-dealer registered under Section 15 of the Exchange Act,16 and each
account for which the municipal advisor would be relying on the Exception is a brokerage
account subject to the Exchange Act,17 the rules thereunder, and the rules of the self-regulatory
organizations(s) of which the broker-dealer is a member. In addition, the municipal advisor could
not exercise investment discretion (as defined in Section 3(a)(35) of the Exchange Act)18 with
respect to the account, unless granted by the municipal entity client on a temporary or limited
basis.19
Under proposed section (b) of paragraph .14 of the Supplementary Material, neither the
municipal advisor nor any affiliate of the municipal advisor may be providing, or have provided,
advice to the municipal entity client as to an issue of municipal securities or a municipal
financial product that is directly related to the principal transaction, except advice as to another
principal transaction that also meets all the other requirements of proposed paragraph .14. For
example, a municipal advisor could not use the Exception to reinvest proceeds from an issue of
municipal securities where it was a municipal advisor as to such issue. A municipal advisor
could use the Exception, however, for two principal transactions with the same municipal entity
client where the transactions are directly related to one another, so long as all of the conditions
and limitations of the Exception are met as to each transaction.
Proposed section (c) of paragraph .14 of the Supplementary Material would limit a
municipal advisor’s principal transactions under the Exception to sales to or purchases from a
municipal entity client of any U.S. Treasury security, agency debt security or corporate debt
security. In addition, the proposed Exception would not be available for transactions involving
municipal escrow investments as defined in Exchange Act Rule 15Ba1-1(h)20 because the MSRB
believes that this is an area of heightened risk where, historically, significant abuses have
occurred. The inclusion in the Exception of transactions in this class of fixed income securities is
Section 206(3) (15 U.S.C. 80b-6(3)) or Advisers Act Rule 206(3)-3T (17 CFR
275.206(3)-3T).
16
15 U.S.C. 78o.
17
15 U.S.C. 78a et seq.
18
15 U.S.C. 78(c)(a)(35).
19
The proposed requirements are similar to those found in Advisers Act Rule 206(3)T(a)(7) and (1), respectively. 17 CFR 275.206(3)-3T(a)(7) and (1).
20
17 CFR 240.15Ba1-1(h).
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intended to address the concerns of commenters that an absolute ban on principal transactions in
fixed income securities, which are frequently sold by broker-dealers as principal or riskless
principal, would be particularly problematic, and also addresses comments that an exception
limited to these generally relatively liquid securities trading in relatively transparent markets
would raise significantly less risk for municipal entity clients.21 The proposed class of securities
may be broader than what would be permitted by relevant bond documents or a particular
municipal entity’s investment policies, but, in such cases, the restrictions in the bond documents
or the municipal entity’s investment policies would appropriately control. The terms “U.S.
Treasury security,” “agency debt security” and “corporate debt security,” and related terms,
“agency,” “government-sponsored enterprise,” “money market instrument” and “securitized
product” would be defined for purposes of proposed paragraphs .14 and .15 of the
Supplementary Material in new proposed paragraph .15 of the Supplementary Material.
To comply with proposed section (d) of paragraph .14 of the Supplementary Material, a
municipal advisor would have two options. These two options draw, as generally urged by
commenters, upon the procedural requirements in Advisers Act Section 206(3)22 and Advisers
Act Rule 206(3)-3T(a),23 respectively. Under the first option, which is set forth in proposed
subsection (d)(1) of paragraph .14, a municipal advisor would be required, on a transaction-bytransaction basis, to disclose to the municipal entity client in writing before the completion of the
principal transaction the capacity in which the municipal advisor is acting and obtain the consent
of the client to such transaction. Consent would mean informed consent, and in order to make
informed consent, the municipal advisor, consistent with its fiduciary duty, would be required to
disclose specified information, including the price and other terms of the transaction, as well as
the capacity in which the municipal advisor would be acting. “Before completion” would mean
either prior to execution of the transaction, or after execution but prior to the settlement of the
transaction.24
21
For example, SIFMA noted the need for an exception to the ban was particularly acute
with respect to transactions between a municipal advisor/broker-dealer and its municipal
entity client in fixed income securities since “nearly all transactions in fixed-income
securities are effected on a principal basis.” GFOA noted that municipal entities might be
subject to additional costs regarding advice on “investments that are not considered to be
risky,” and FSI specifically suggested that an exception to the ban for broker-dealers
providing advice incidental to securities execution services be limited to transactions in a
similar group of fixed income securities.
22
15 U.S.C.80b-6(3).
23
See 17 CFR 275.206(3)-3T(a).
24
These parameters are substantially similar to long-standing interpretive guidance
regarding Advisers Act Section 206(3). See SEC Interpretation of Section 206(3) of the
Investment Advisers Act of 1940, Rel. No. IA - 1732 (July 17, 1998) (“The protection
provided to advisory clients by the consent requirement of Section 206(3) would be
weakened, however, without sufficient disclosure of the potential conflicts of interest and
9 of 33
Alternatively, a municipal advisor could comply with proposed subsection (d)(2) of
paragraph .14 by meeting six requirements, as set forth in proposed paragraphs (d)(2)(A) through
(F) of paragraph .14 and summarized below. First, under proposed paragraph (d)(2)(A), neither
the municipal advisor nor any of its affiliates could be the issuer, or the underwriter (as defined
in Exchange Act Rule 15c2-12(f)(8)),25 of a security that is the subject of the principal
transaction.
Second, under proposed paragraph (d)(2)(B), the municipal advisor would be required to
obtain from the municipal entity client an executed written, revocable consent that would
prospectively authorize the municipal advisor directly or indirectly to act as principal for its own
account in selling a security to or purchasing a security from the municipal entity client, so long
as such written consent were obtained after written disclosure to the municipal entity client
explaining: (i) the circumstances under which the municipal advisor directly or indirectly may
engage in principal transactions; (ii) the nature and significance of conflicts with the municipal
entity client’s interests as a result of the transactions; and (iii) how the municipal advisor
addresses those conflicts.
Third, under proposed paragraph (d)(2)(C), the municipal advisor, prior to the execution
of each principal transaction, would be required to: (i) inform the municipal entity client, orally
or in writing, of the capacity in which it may act with respect to such transaction and (ii) obtain
consent from the municipal entity client, orally or in writing, to act as principal for its own
account with respect to such transaction.
Fourth, under proposed paragraph (d)(2)(D), a municipal advisor would be required to
send a written confirmation at or before completion of each principal transaction that includes
the information required by 17 CFR 240.10b-10 or MSRB Rule G-15, and a conspicuous, plain
English statement informing the municipal entity client that the municipal advisor: (i) disclosed
to the client prior to the execution of the transaction that the municipal advisor may be acting in a
principal capacity in connection with the transaction and the client authorized the transaction and
(ii) sold the security to, or bought the security from, the client for its own account.
Fifth, under proposed paragraph (d)(2)(E), a municipal advisor would be required to send
its municipal entity client, no less frequently than annually, written disclosure containing a list of
all transactions that were executed in the client’s account in reliance upon this Exception, and the
date and price of the transactions.
Sixth, under proposed paragraph (d)(2)(F), each written disclosure would be required to
the terms of a transaction. In our view, to ensure that a client’s consent to a Section
206(3) transaction is informed, Section 206(3) should be read together with Sections
206(1) and 206(2) to require the adviser to disclose facts necessary to alert the client to
the adviser’s potential conflicts of interest in a principal . . . transaction.”).
25
17 CFR 240.15c2-12(f)(8).
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include a conspicuous, plain English statement regarding the ability of the municipal entity client
to revoke the prospective written consent to principal transactions without penalty at any time by
written notice.
A municipal advisor’s use and compliance with the requirements of the Exception would
not be construed as relieving it in any way from acting in the best interests of its municipal entity
client nor from any obligation that may be imposed by the Exchange Act, other provisions of
Proposed Rule G-42 (other than subsection (e)(ii) of the proposed rule), or other applicable
provisions of the federal securities laws and state law.
Other Amendments
In Amendment No. 2, the MSRB makes five minor, technical amendments, which would
clarify, correct cross-references in, or renumber certain provisions of Proposed Rule G-42. First,
the MSRB is making minor, technical changes to Proposed Rule G-42(d) regarding
recommendations. These amendments set forth the initial text that precedes proposed subsection
(d)(i) in two sentences rather than one. The purpose of this change is to clarify the requirements
that would apply when a municipal advisor makes a recommendation of a municipal securities
transaction or municipal financial product and when a municipal advisor reviews such a
recommendation of another party. These amendments also clarify in the initial text that precedes
proposed subsection (d)(i), consistent with Proposed Rule G-42(d)(ii), that a municipal advisor
reviewing a recommendation of another party could determine that the recommended municipal
securities transaction or municipal financial product is not suitable for the client.
Second, Amendment No. 2 revises proposed Rule G-42(e)(ii) to begin with the new
clause, “Except as provided in paragraph .14 of the Supplementary Material of this rule,” and
then continue as previously proposed, except that the phrase “municipal securities transaction” is
changed to “issue of municipal securities” in order to more closely track the relevant statutory
language.26 Third, to alphabetize the definitions set forth in proposed section (f), the proposed
definition of the term “Principal transaction” is renumbered from subsection (f)(i) to subsection
(f)(ix). The other eight definitions, set forth as subsections (f)(ii) through (f)(ix), are renumbered,
accordingly, as subsections (f)(i) through (f)(viii). Fourth, in proposed paragraphs of the
Supplementary Material, references to “this paragraph” are amended to include the appropriate
paragraph number (e.g., in proposed paragraph .01 of the Supplementary Material, “this
paragraph” is amended to read “this paragraph .01”). Fifth, the order of proposed paragraphs .12
and .13 of the Supplementary Material is reversed, which organizes the two paragraphs
addressing principal transactions to appear consecutively and improves the readability of the
rule. In addition, in proposed paragraph .13 (as renumbered), the cross-reference to the definition
of the term “principal transaction” is corrected.
The changes made by Amendment No. 2 to the proposed rule change are indicated in
attached Exhibit 4. Material proposed to be added is underlined; material proposed to be deleted
is enclosed in brackets.
26
See, e.g., 15 U.S.C. 78o-4(b)(2).
11 of 33
The text of the proposed rule change, as amended by Amendment No. 2, is attached as
Exhibit 5. Material proposed to be added is underlined; material proposed to be deleted is
enclosed in brackets.
12 of 33
EXHIBIT 4
Rule G-42: Duties of Non-Solicitor Municipal Advisors
(a)
Standards of Conduct.
(i)
A municipal advisor to an obligated person client shall, in the conduct of all
municipal advisory activities for that client, be subject to a duty of care.
(ii)
A municipal advisor to a municipal entity client shall, in the conduct of all
municipal advisory activities for that client, be subject to a fiduciary duty that includes a duty of
loyalty and a duty of care.
(b)
Disclosure of Conflicts of Interest and Other Information. A municipal advisor must,
prior to or upon engaging in municipal advisory activities, provide to the municipal entity or
obligated person client full and fair disclosure in writing of:
(i)
all material conflicts of interest, including:
(A)
any affiliate of the municipal advisor that provides any advice, service, or
product to or on behalf of the client that is directly related to the municipal advisory
activities to be performed by the disclosing municipal advisor;
(B)
any payments made by the municipal advisor, directly or indirectly, to
obtain or retain an engagement to perform municipal advisory activities for the client;
(C)
any payments received by the municipal advisor from a third party to
enlist the municipal advisor’s recommendation to the client of its services, any municipal
securities transaction or any municipal financial product;
(D)
any fee-splitting arrangements involving the municipal advisor and any
provider of investments or services to the client;
(E)
any conflicts of interest arising from compensation for municipal advisory
activities to be performed that is contingent on the size or closing of any transaction as to
which the municipal advisor is providing advice; and
(F)
any other actual or potential conflicts of interest, of which the municipal
advisor is aware after reasonable inquiry, that could reasonably be anticipated to impair
the municipal advisor’s ability to provide advice to or on behalf of the client in
accordance with the standards of conduct of section (a) of this rule, as applicable.
If a municipal advisor concludes that it has no known material conflicts of interest based on the
exercise of reasonable diligence by the municipal advisor, the municipal advisor must provide a
written statement to the client to that effect.
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(ii)
any legal or disciplinary event that is material to the client’s evaluation of the
municipal advisor or the integrity of its management or advisory personnel.
Information regarding legal or disciplinary events may be disclosed for purposes of this
subsection by identification of the specific type of event and specific reference to the relevant
portions of the municipal advisor’s most recent Forms MA or MA-I filed with the Commission if
the municipal advisor provides detailed information specifying where the client may
electronically access such forms.
(c)
Documentation of Municipal Advisory Relationship. A municipal advisor must evidence
each of its municipal advisory relationships by a writing or writings created and delivered to the
municipal entity or obligated person client prior to, upon or promptly after the establishment of
the municipal advisory relationship. The writing(s) must be dated and include, at a minimum,
(i)
the form and basis of direct or indirect compensation, if any, for the municipal
advisory activities to be performed;
(ii)
the information required to be disclosed by section (b) of this rule;
(iii)
a description of the specific type of information regarding legal and disciplinary
events requested by the Commission on Form MA and Form MA-I, which includes information
about any criminal actions, regulatory actions, investigations, terminations, judgments, liens,
civil judicial actions, customer complaints, arbitrations and civil litigation, and detailed
information specifying where the client may electronically access the municipal advisor’s most
recent Form MA and each most recent Form MA-I filed with the Commission;
(iv)
the date of the last material change or addition to the legal or disciplinary event
disclosures on any Form MA or Form MA-I filed with the Commission by the municipal advisor
and a brief explanation of the basis for the materiality of the change or addition;
(v)
the scope of the municipal advisory activities to be performed and any limitations
on the scope of the engagement;
(vi)
the date, triggering event, or means for the termination of the municipal advisory
relationship, or, if none, a statement that there is none; and
(vii)
any terms relating to withdrawal from the municipal advisory relationship.
(d)
Recommendations and Review of Recommendations of Other Parties. If a municipal
advisor makes a recommendation of a municipal securities transaction or municipal financial
product to a municipal entity or obligated person client, it must have a reasonable basis to
believe that the recommended municipal securities transaction or municipal financial product is
suitable for the client, based on the information obtained through the reasonable diligence of the
municipal advisor.[or, i] If the review of a recommendation of another party is requested by the
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municipal entity or obligated person client and within the scope of the engagement, the
municipal advisor must determine, based on the information obtained through the reasonable
diligence of such municipal advisor, whether the municipal securities transaction or municipal
financial product is or is not suitable for the client[, and a municipal advisor making a
recommendation must have a reasonable basis to believe that the recommended municipal
securities transaction or municipal financial product is suitable for the client]. In addition, the
municipal advisor must inform the client of:
(i)
the municipal advisor’s evaluation of the material risks, potential benefits,
structure, and other characteristics of the recommended municipal securities transaction or
municipal financial product;
(ii)
the basis upon which the municipal advisor reasonably believes that the
recommended municipal securities transaction or municipal financial product is, or (as may be
applicable in the case of a review of a recommendation) is not, suitable for the client; and
(iii)
whether the municipal advisor has investigated or considered other reasonably
feasible alternatives to the recommended municipal securities transaction or municipal financial
product that might also or alternatively serve the client’s objectives.
(e)
Specified Prohibitions.
(i)
A municipal advisor is prohibited from:
(A)
receiving compensation that is excessive in relation to the municipal
advisory activities actually performed;
(B)
delivering an invoice for fees or expenses for municipal advisory activities
that is materially inaccurate in its reflection of the activities actually performed or the
personnel that actually performed those activities;
(C)
making any representation or the submission of any information that the
municipal advisor knows or should know is either materially false or materially
misleading due to the omission of a material fact about the capacity, resources or
knowledge of the municipal advisor, in response to requests for proposals or
qualifications or in oral presentations to a client or prospective client, for the purpose of
obtaining or retaining an engagement to perform municipal advisory activities;
(D)
making, or participating in, any fee-splitting arrangement with
underwriters on any municipal securities transaction as to which it has provided or is
providing advice, and any undisclosed fee-splitting arrangements with providers of
investments or services to a municipal entity or obligated person client of the municipal
advisor; and
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(E)
making payments for the purpose of obtaining or retaining an engagement
to perform municipal advisory activities other than: (1) payments to an affiliate of the
municipal advisor for a direct or indirect communication with a municipal entity or
obligated person on behalf of the municipal advisor where such communication is made
for the purpose of obtaining or retaining an engagement to perform municipal advisory
activities; (2) reasonable fees paid to another municipal advisor registered as such with
the Commission and the Board for making such a communication as described in
subparagraph (e)(i)(E)(1); and (3) payments that are permissible “normal business
dealings” as described in Rule G-20.
(ii)
Except as provided for in paragraph .14 of the Supplementary Material of this
rule, [A]a municipal advisor to a municipal entity client, and any affiliate of such municipal
advisor, is prohibited from engaging with the municipal entity client in a principal transaction
that is the same, or directly related to the, issue of municipal securities [transaction]or municipal
financial product as to which the municipal advisor is providing or has provided advice to the
municipal entity client.
(f)
Definitions.
[(i)
“Principal transaction” shall mean, for purposes of this rule, when acting as
principal for one’s own account, a sale to or a purchase from the municipal entity client of any
security or entrance into any derivative, guaranteed investment contract, or other similar
financial product with the municipal entity client.]
(i)[(ii)]
“Advice” shall, for purposes of this rule, have the same meaning as in
Section 15B(e)(4)(A)(i) of the Act, 17 CFR 240.15Ba1-1(d)(1)(ii) and other rules and regulations
thereunder.
(ii)[(iii)]
“Affiliate of the municipal advisor” shall mean, for purposes of this rule,
any person directly or indirectly controlling, controlled by, or under common control with such
municipal advisor.
(iii)[(iv)]
“Municipal advisor” shall, for purposes of this rule, have the same
meaning as in Section 15B(e)(4) of the Act, 17 CFR 240.15Ba1-1(d)(1)-(4) and other rules and
regulations thereunder; provided that it shall exclude a person that is otherwise a municipal
advisor solely based on activities within the meaning of Section 15B(e)(4)(A)(ii) of the Act and
rules and regulations thereunder or any solicitation of a municipal entity or obligated person
within the meaning of Section 15B(e)(9) of the Act and rules and regulations thereunder.
(iv)[(v)]
“Municipal advisory activities” shall, for purposes of this rule, mean those
activities that would cause a person to be a municipal advisor as defined in subsection (f)(iv) of
this rule.
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(v)[(vi)]
A “municipal advisory relationship” shall, for purposes of this rule, be
deemed to exist when a municipal advisor enters into an agreement to engage in municipal
advisory activities for a municipal entity or obligated person. The municipal advisory
relationship shall be deemed to have ended on the date which is the earlier of (i) the date on
which the municipal advisory relationship has terminated pursuant to the terms of the
documentation of the municipal advisory relationship required in section (c) of this rule or (ii)
the date on which the municipal advisor withdraws from the municipal advisory relationship.
(vi)[(vii)]
“Municipal entity” shall, for purposes of this rule, have the same meaning
as in Section 15B(e)(8) of the Act, 17 CFR 240.15Ba1-1(g) and other rules and regulations
thereunder.
(vii)[(viii)]
“Obligated person” shall, for purposes of this rule, have the same meaning
as in Section 15B(e)(10) of the Act, 17 CFR 240.15Ba1-1(k) and other rules and regulations
thereunder.
(viii)[(ix)]
“Official statement” shall, for purposes of this rule, have the same
meaning as in Rule G-32(d)(vii).
(ix)
“Principal transaction” shall mean, for purposes of this rule, when acting as
principal for one’s own account, a sale to or a purchase from the municipal entity client of any
security or entrance into any derivative, guaranteed investment contract, or other similar
financial product with the municipal entity client.
---Supplementary Material:
.01 Duty of Care. Municipal advisors must exercise due care in performing their municipal
advisory activities. The duty of care includes, but is not limited to, the obligations discussed in
this paragraph .01. A municipal advisor must possess the degree of knowledge and expertise
needed to provide the municipal entity or obligated person client with informed advice. A
municipal advisor also must make a reasonable inquiry as to the facts that are relevant to a
client’s determination as to whether to proceed with a course of action or that form the basis for
any advice provided to the client. A municipal advisor must undertake a reasonable investigation
to determine that it is not basing any recommendation on materially inaccurate or incomplete
information. Among other matters, a municipal advisor must have a reasonable basis for:
(a)
any advice provided to or on behalf of a client;
(b)
any representations made in a certificate that it signs that will be reasonably
foreseeably relied upon by the client, any other party involved in the municipal securities
transaction or municipal financial product, or investors in the municipal entity client’s securities
or securities secured by payments from an obligated person client; and
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(c)
any information provided to the client or other parties involved in the municipal
securities transaction in connection with the preparation of an official statement for any issue of
municipal securities as to which the municipal advisor is advising.
.02 Duty of Loyalty. Municipal advisors must fulfill a duty of loyalty in performing their
municipal advisory activities for municipal entity clients. The duty of loyalty includes, but is not
limited to, the obligations discussed in this paragraph .02. A municipal advisor must deal
honestly and with the utmost good faith with a municipal entity client and act in the client’s best
interests without regard to the financial or other interests of the municipal advisor. A municipal
advisor must not engage in municipal advisory activities for a municipal entity client if it cannot
manage or mitigate its conflicts of interest in a manner that will permit it to act in the municipal
entity’s best interests.
.03 Action Independent of or Contrary to Advice. If a municipal entity or obligated person
client of a municipal advisor elects a course of action that is independent of or contrary to advice
provided by the municipal advisor, the municipal advisor is not required on that basis to
disengage from the municipal advisory relationship.
.04 Limitations on the Scope of the Engagement. Nothing contained in this rule shall be
construed to permit the municipal advisor to alter the standards of conduct or impose limitations
on any of the duties prescribed herein. If requested or expressly consented to by the municipal
entity or obligated person client, however, a municipal advisor may limit the scope of the
municipal advisory activities to be performed to certain specified activities or services. If the
municipal advisor engages in a course of conduct that is inconsistent with any such agreed upon
limitations, it may result in negating the effectiveness of such limitations.
.05 Conflicts of Interest. Disclosures of conflicts of interest by a municipal advisor to its
municipal entity or obligated person client must be sufficiently detailed to inform the client of
the nature, implications and potential consequences of each conflict. Such disclosures also must
include an explanation of how the municipal advisor addresses or intends to manage or mitigate
each conflict.
.06 Relationship Documentation. During the term of the municipal advisory relationship, the
writing(s) required by section (c) of this rule must be promptly amended or supplemented to
reflect any material changes or additions, and the amended writing(s) or supplement must be
promptly delivered to the client. This amendment and supplementation requirement applies to
any changes and additions that are discovered, or should have been discovered, based on the
exercise of reasonable diligence by the municipal advisor. The information described in
subsection (c)(ii) of this rule is not required if the municipal advisor previously fully complied
with the requirements of section (b) of this rule to disclose conflicts of interest and other
information and subsection (c)(ii) would not require the disclosure of any materially different
information than that previously disclosed to the client.
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.07 Inadvertent Advice. A municipal advisor is not required to comply with sections (b) and (c)
of this rule if the municipal advisor meets all of the following requirements. In the event that a
municipal advisor inadvertently engages in municipal advisory activities for a municipal entity or
obligated person and does not intend to continue the municipal advisory activities or enter into a
municipal advisory relationship, the municipal advisor must, as promptly as possible after
discovery of the provision of inadvertent advice, provide a document to such municipal entity or
obligated person that is dated and includes:
(a)
a disclaimer that the municipal advisor did not intend to provide advice and that,
effective immediately, it has ceased engaging in municipal advisory activities with respect to that
municipal entity or obligated person in regard to all transactions and municipal financial
products as to which advice was inadvertently provided;
(b)
a notification that such municipal entity or obligated person should be aware that
the disclosure of material conflicts of interest and other information required by section (b) of
this rule has not been provided;
(c)
an identification of all of the advice that was inadvertently provided, based on a
reasonable investigation; and
(d)
document.
a request that the municipal entity or obligated person acknowledge receipt of the
A municipal advisor utilizing this alternative must promptly conduct a review of its written
supervisory and compliance policies and procedures to ensure they are reasonably designed to
prevent the provision of inadvertent advice to municipal entities and obligated persons. The use
of this alternative has no effect on the applicability of any provisions of this rule other than
sections (b) and (c) or any other legal requirements applicable to municipal advisory activities.
.08 Applicability of State or Other Laws and Rules. Municipal advisors may be subject to
fiduciary or other duties under state or other laws. Nothing contained in this rule shall be deemed
to supersede any more restrictive provision of state or other laws applicable to municipal
advisory activities. In addition, the specific prohibition in subsection (e)(ii) of this rule shall not
apply to an acquisition as principal, either alone or as a participant in a syndicate or other similar
account formed for the purpose of purchasing, directly or indirectly, from an issuer all or any
portion of an issuance of municipal securities on the basis that the municipal advisor provided
advice as to the issuance because that is a type of transaction that is addressed and prohibited in
certain circumstances by Rule G-23.
.09 Suitability. A determination of whether a municipal securities transaction or municipal
financial product is suitable must be based on numerous factors, as applicable to the particular
type of client, including, but not limited to, the client’s financial situation and needs, objectives,
tax status, risk tolerance, liquidity needs, experience with municipal securities transactions or
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municipal financial products generally or of the type and complexity being recommended,
financial capacity to withstand changes in market conditions during the term of the municipal
financial product or the period that municipal securities to be issued in the municipal securities
transaction are reasonably expected to be outstanding and any other material information known
by the municipal advisor about the client and the municipal securities transaction or municipal
financial product, after reasonable inquiry.
.10 Know Your Client. A municipal advisor must use reasonable diligence, in regard to the
maintenance of the municipal advisory relationship, to know and retain the essential facts
concerning the client and concerning the authority of each person acting on behalf of such client.
The facts “essential” to “knowing a client” include those required to:
(a)
effectively service the municipal advisory relationship with the client;
(b)
act in accordance with any special directions from the client;
(c)
understand the authority of each person acting on behalf of the client; and
(d)
comply with applicable laws, regulations and rules.
.11 Excessive Compensation. Depending on the specific facts and circumstances of the
engagement, a municipal advisor’s compensation may be so disproportionate to the nature of the
municipal advisory activities performed as to constitute an unfair practice in violation of Rule
G-17. Among the factors relevant to whether a municipal advisor’s compensation is
disproportionate to the nature of the municipal advisory activities performed are the municipal
advisor’s expertise, the complexity of the municipal securities transaction or municipal financial
product, whether the fee is contingent upon the closing of the municipal securities transaction or
municipal financial product, the length of time spent on the engagement and whether the
municipal advisor is paying any other relevant costs related to the municipal securities
transaction or municipal financial product.
.12 529 College Savings Plans and Other Municipal Fund Securities. This rule applies
equally to municipal advisors to sponsors or trustees of 529 college savings plans and other
municipal fund securities. All references in this rule to an “official statement” include the plan
disclosure document for a 529 college savings plan and the investment circular or information
statement for a local government investment pool.
[.12].13 Principal Transactions - Other Similar Financial Products. For purposes of
subsection (f)(ix)[(i)] of this rule, which defines the term “principal transaction,” the phrase
“other similar financial product” includes a bank loan, but only if it is in an aggregate principal
amount of $1,000,000 or more and it is economically equivalent to the purchase of one or more
municipal securities.
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[.13 529 College Savings Plans and Other Municipal Fund Securities. This rule applies
equally to municipal advisors to sponsors or trustees of 529 college savings plans and other
municipal fund securities. All references in this rule to an “official statement” include the plan
disclosure document for a 529 college savings plan and the investment circular or information
statement for a local government investment pool.]
.14 Principal Transactions - Exception for Transactions in Specified Fixed Income
Securities. Engaging in a principal transaction with a municipal entity client is not specifically
prohibited under subsection (e)(ii) of this rule if:
(a)
the municipal advisor is a broker-dealer registered under Section 15 of the Act,
and each account as to which the municipal advisor relies on this paragraph .14 is a brokerage
account subject to the Act, and the rules thereunder, and the rules of the self-regulatory
organization(s) of which it is a member, and is an account as to which the municipal advisor
exercises no investment discretion (as defined in Section 3(a)(35) of the Act), except investment
discretion granted by a municipal entity client on a temporary or limited basis;
(b)
neither the municipal advisor, nor any affiliate of the municipal advisor, is
providing or has provided advice to the municipal entity client as to an issue of municipal
securities or a municipal financial product that is directly related to the principal transaction
(other than advice as to another principal transaction under circumstances meeting all the
requirements of this paragraph .14);
(c)
the principal transaction is a sale to or a purchase from the municipal entity client
of any U.S. Treasury security, agency debt security, or corporate debt security (as defined in
paragraph .15 of the Supplementary Material) and does not involve municipal escrow
investments (as defined in 17 CFR 240.15Ba1-1(h)); and
(d)
the municipal advisor either: (1) discloses to the municipal entity client in writing
before the completion of the transaction the capacity in which the municipal advisor is acting and
obtains the consent of the municipal entity client to such transaction or (2) executes the
transaction under circumstances meeting all of the following requirements:
(A) neither the municipal advisor nor any of its affiliates are the issuer of, or, at
the time of the sale, an underwriter (as defined in 17 CFR 240.15c2-12(f)(8)) of, the
security;
(B) the municipal entity client has executed a written, revocable consent
prospectively authorizing the municipal advisor directly or indirectly to act as principal
for its own account in selling any security to or purchasing any security from the
municipal entity client, so long as such written consent is obtained after written
disclosure to the municipal entity client explaining: the circumstances under which the
municipal advisor directly or indirectly may engage in principal transactions; the nature
and significance of conflicts with its municipal entity client’s interests as a result of the
transactions; and how the municipal advisor addresses those conflicts;
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(C) the municipal advisor, prior to the execution of each principal transaction,
informs the municipal entity client, orally or in writing, of the capacity in which it may
act with respect to such transaction and obtains consent from the municipal entity client,
orally or in writing, to act as principal for its own account with respect to such
transaction;
(D) the municipal advisor sends a written confirmation at or before completion of
each such transaction that includes, in addition to the information required by 17 CFR
240.10b-10 or Rule G-15, a conspicuous, plain English statement informing the
municipal entity client that the municipal advisor disclosed to the client prior to the
execution of the transaction that the municipal advisor may be acting in a principal
capacity in connection with the transaction, the municipal entity client authorized the
transaction, and the municipal advisor sold the security to, or bought the security from,
the municipal entity client for its own account;
(E) the municipal advisor sends to the municipal entity client, no less frequently
than annually, written disclosure containing a list of all transactions that were executed in
the client’s account in reliance upon subsection (d)(2) of this paragraph .14, and the date
and price of such transactions; and
(F) each written disclosure required by subsection (d)(2) of this paragraph .14
includes a conspicuous, plain English statement that the municipal entity client may
revoke the written consent referred to in paragraph (d)(2)(B) of this paragraph .14
without penalty at any time by written notice to the municipal advisor.
This paragraph .14 shall not be construed as relieving in any way a municipal advisor from
acting in the best interests of its municipal entity clients, nor shall it relieve the municipal advisor
from any obligation that may be imposed by other applicable provisions of the federal securities
laws and state law.
.15 Terms Relating to the Exception in Paragraph .14. For purposes of paragraph .14 and this
paragraph .15 of the Supplementary Material:
(a) “agency” means a U.S. executive agency as defined in 5 U.S.C. 105 that is authorized
to issue debt directly or through a related entity, such as a government corporation, or to
guarantee the repayment of principal and/or interest of a debt security issued by another entity.
The term excludes the U.S. Department of the Treasury in the exercise of its authority to issue
U.S. Treasury securities;
(b) “agency debt security” means a debt security (i) issued or guaranteed by an agency, or
(ii) issued or guaranteed by a government-sponsored enterprise, including a securitized product
that is issued by an agency or a government-sponsored enterprise, or, for which, the principal or
interest (or both) is guaranteed by an agency or a government-sponsored enterprise;
(c) “corporate debt security” means a debt security that is U.S. dollar-denominated and
issued by a U.S. or foreign private issuer and, if a “restricted security” as defined in 17 CFR
230.144(a)(3), sold pursuant to 17 CFR 230.144A, but does not include a money market
instrument;
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(d) “government-sponsored enterprise” has the same meaning as defined in 2 U.S.C.
622(8);
(e) “money market instrument” means a debt security that at issuance has a maturity of
one calendar year or less, or, if a discount note issued by an agency or a government-sponsored
enterprise, a maturity of one calendar year and one day or less;
(f) “securitized product” means a security collateralized by any type of financial asset,
such as a loan, a lease, a mortgage, or a secured or unsecured receivable, and includes, but is not
limited to, an asset-backed security, a synthetic asset-backed security, and any residual tranche or
interest of any security specified above, which tranche or interest is considered a debt security;
and
(g) “U.S. Treasury security” means a security issued by the U.S. Department of the
Treasury to fund the operations of the federal government or to retire such outstanding securities.
*****
Rule G-8: Books and Records to be Made by Brokers, Dealers, Municipal Securities
Dealers, and Municipal Advisors
(a) - (g) No change.
(h)
Municipal Advisor Records. Every municipal advisor that is registered or required to be
registered under Section 15B of the Act and the rules and regulations thereunder shall make and
keep current the following books and records:
(i)
No change.
(ii)
Reserved.
(iii)
Reserved.
(iv)
Records Concerning Duties of Non-Solicitor Municipal Advisors pursuant to Rule
G-42.
(A) A copy of any document created by a municipal advisor that was material to
its review of a recommendation by another party or that memorializes the basis for any
determination as to suitability.
(v)
No change.
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EXHIBIT 5
Rule G-42: Duties of Non-Solicitor Municipal Advisors
(a)
Standards of Conduct.
(i)
A municipal advisor to an obligated person client shall, in the conduct of all
municipal advisory activities for that client, be subject to a duty of care.
(ii)
A municipal advisor to a municipal entity client shall, in the conduct of all
municipal advisory activities for that client, be subject to a fiduciary duty that includes a duty of
loyalty and a duty of care.
(b)
Disclosure of Conflicts of Interest and Other Information. A municipal advisor must,
prior to or upon engaging in municipal advisory activities, provide to the municipal entity or
obligated person client full and fair disclosure in writing of:
(i)
all material conflicts of interest, including:
(A)
any affiliate of the municipal advisor that provides any advice, service, or
product to or on behalf of the client that is directly related to the municipal advisory
activities to be performed by the disclosing municipal advisor;
(B)
any payments made by the municipal advisor, directly or indirectly, to
obtain or retain an engagement to perform municipal advisory activities for the client;
(C)
any payments received by the municipal advisor from a third party to
enlist the municipal advisor’s recommendation to the client of its services, any municipal
securities transaction or any municipal financial product;
(D)
any fee-splitting arrangements involving the municipal advisor and any
provider of investments or services to the client;
(E)
any conflicts of interest arising from compensation for municipal advisory
activities to be performed that is contingent on the size or closing of any transaction as to
which the municipal advisor is providing advice; and
(F)
any other actual or potential conflicts of interest, of which the municipal
advisor is aware after reasonable inquiry, that could reasonably be anticipated to impair
the municipal advisor’s ability to provide advice to or on behalf of the client in
accordance with the standards of conduct of section (a) of this rule, as applicable.
If a municipal advisor concludes that it has no known material conflicts of interest based on the
exercise of reasonable diligence by the municipal advisor, the municipal advisor must provide a
written statement to the client to that effect.
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(ii)
any legal or disciplinary event that is material to the client’s evaluation of the
municipal advisor or the integrity of its management or advisory personnel.
Information regarding legal or disciplinary events may be disclosed for purposes of this
subsection by identification of the specific type of event and specific reference to the relevant
portions of the municipal advisor’s most recent Forms MA or MA-I filed with the Commission if
the municipal advisor provides detailed information specifying where the client may
electronically access such forms.
(c)
Documentation of Municipal Advisory Relationship. A municipal advisor must evidence
each of its municipal advisory relationships by a writing or writings created and delivered to the
municipal entity or obligated person client prior to, upon or promptly after the establishment of
the municipal advisory relationship. The writing(s) must be dated and include, at a minimum,
(i)
the form and basis of direct or indirect compensation, if any, for the municipal
advisory activities to be performed;
(ii)
the information required to be disclosed by section (b) of this rule;
(iii)
a description of the specific type of information regarding legal and disciplinary
events requested by the Commission on Form MA and Form MA-I, which includes information
about any criminal actions, regulatory actions, investigations, terminations, judgments, liens,
civil judicial actions, customer complaints, arbitrations and civil litigation, and detailed
information specifying where the client may electronically access the municipal advisor’s most
recent Form MA and each most recent Form MA-I filed with the Commission;
(iv)
the date of the last material change or addition to the legal or disciplinary event
disclosures on any Form MA or Form MA-I filed with the Commission by the municipal advisor
and a brief explanation of the basis for the materiality of the change or addition;
(v)
the scope of the municipal advisory activities to be performed and any limitations
on the scope of the engagement;
(vi)
the date, triggering event, or means for the termination of the municipal advisory
relationship, or, if none, a statement that there is none; and
(vii)
any terms relating to withdrawal from the municipal advisory relationship.
(d)
Recommendations and Review of Recommendations of Other Parties. If a municipal
advisor makes a recommendation of a municipal securities transaction or municipal financial
product to a municipal entity or obligated person client, it must have a reasonable basis to
believe that the recommended municipal securities transaction or municipal financial product is
suitable for the client, based on the information obtained through the reasonable diligence of the
municipal advisor. If the review of a recommendation of another party is requested by the
25 of 33
municipal entity or obligated person client and within the scope of the engagement, the
municipal advisor must determine, based on the information obtained through the reasonable
diligence of such municipal advisor, whether the municipal securities transaction or municipal
financial product is or is not suitable for the client. In addition, the municipal advisor must
inform the client of:
(i)
the municipal advisor’s evaluation of the material risks, potential benefits,
structure, and other characteristics of the recommended municipal securities transaction or
municipal financial product;
(ii)
the basis upon which the municipal advisor reasonably believes that the
recommended municipal securities transaction or municipal financial product is, or (as may be
applicable in the case of a review of a recommendation) is not, suitable for the client; and
(iii)
whether the municipal advisor has investigated or considered other reasonably
feasible alternatives to the recommended municipal securities transaction or municipal financial
product that might also or alternatively serve the client’s objectives.
(e)
Specified Prohibitions.
(i)
A municipal advisor is prohibited from:
(A)
receiving compensation that is excessive in relation to the municipal
advisory activities actually performed;
(B)
delivering an invoice for fees or expenses for municipal advisory activities
that is materially inaccurate in its reflection of the activities actually performed or the
personnel that actually performed those activities;
(C)
making any representation or the submission of any information that the
municipal advisor knows or should know is either materially false or materially
misleading due to the omission of a material fact about the capacity, resources or
knowledge of the municipal advisor, in response to requests for proposals or
qualifications or in oral presentations to a client or prospective client, for the purpose of
obtaining or retaining an engagement to perform municipal advisory activities;
(D)
making, or participating in, any fee-splitting arrangement with
underwriters on any municipal securities transaction as to which it has provided or is
providing advice, and any undisclosed fee-splitting arrangements with providers of
investments or services to a municipal entity or obligated person client of the municipal
advisor; and
(E)
making payments for the purpose of obtaining or retaining an engagement
to perform municipal advisory activities other than: (1) payments to an affiliate of the
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municipal advisor for a direct or indirect communication with a municipal entity or
obligated person on behalf of the municipal advisor where such communication is made
for the purpose of obtaining or retaining an engagement to perform municipal advisory
activities; (2) reasonable fees paid to another municipal advisor registered as such with
the Commission and the Board for making such a communication as described in
subparagraph (e)(i)(E)(1); and (3) payments that are permissible “normal business
dealings” as described in Rule G-20.
(ii)
Except as provided for in paragraph .14 of the Supplementary Material of this
rule, a municipal advisor to a municipal entity client, and any affiliate of such municipal advisor,
is prohibited from engaging with the municipal entity client in a principal transaction that is the
same, or directly related to the, issue of municipal securities or municipal financial product as to
which the municipal advisor is providing or has provided advice to the municipal entity client.
(f)
Definitions.
(i)
“Advice” shall, for purposes of this rule, have the same meaning as in Section
15B(e)(4)(A)(i) of the Act, 17 CFR 240.15Ba1-1(d)(1)(ii) and other rules and regulations
thereunder.
(ii)
“Affiliate of the municipal advisor” shall mean, for purposes of this rule, any
person directly or indirectly controlling, controlled by, or under common control with such
municipal advisor.
(iii)
“Municipal advisor” shall, for purposes of this rule, have the same meaning as in
Section 15B(e)(4) of the Act, 17 CFR 240.15Ba1-1(d)(1)-(4) and other rules and regulations
thereunder; provided that it shall exclude a person that is otherwise a municipal advisor solely
based on activities within the meaning of Section 15B(e)(4)(A)(ii) of the Act and rules and
regulations thereunder or any solicitation of a municipal entity or obligated person within the
meaning of Section 15B(e)(9) of the Act and rules and regulations thereunder.
(iv)
“Municipal advisory activities” shall, for purposes of this rule, mean those
activities that would cause a person to be a municipal advisor as defined in subsection (f)(iv) of
this rule.
(v)
A “municipal advisory relationship” shall, for purposes of this rule, be deemed to
exist when a municipal advisor enters into an agreement to engage in municipal advisory
activities for a municipal entity or obligated person. The municipal advisory relationship shall be
deemed to have ended on the date which is the earlier of (i) the date on which the municipal
advisory relationship has terminated pursuant to the terms of the documentation of the municipal
advisory relationship required in section (c) of this rule or (ii) the date on which the municipal
advisor withdraws from the municipal advisory relationship.
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(vi)
“Municipal entity” shall, for purposes of this rule, have the same meaning as in
Section 15B(e)(8) of the Act, 17 CFR 240.15Ba1-1(g) and other rules and regulations
thereunder.
(vii) “Obligated person” shall, for purposes of this rule, have the same meaning as in
Section 15B(e)(10) of the Act, 17 CFR 240.15Ba1-1(k) and other rules and regulations
thereunder.
(viii) “Official statement” shall, for purposes of this rule, have the same meaning as in
Rule G-32(d)(vii).
(ix)
“Principal transaction” shall mean, for purposes of this rule, when acting as
principal for one’s own account, a sale to or a purchase from the municipal entity client of any
security or entrance into any derivative, guaranteed investment contract, or other similar
financial product with the municipal entity client.
---Supplementary Material:
.01 Duty of Care. Municipal advisors must exercise due care in performing their municipal
advisory activities. The duty of care includes, but is not limited to, the obligations discussed in
this paragraph .01. A municipal advisor must possess the degree of knowledge and expertise
needed to provide the municipal entity or obligated person client with informed advice. A
municipal advisor also must make a reasonable inquiry as to the facts that are relevant to a
client’s determination as to whether to proceed with a course of action or that form the basis for
any advice provided to the client. A municipal advisor must undertake a reasonable investigation
to determine that it is not basing any recommendation on materially inaccurate or incomplete
information. Among other matters, a municipal advisor must have a reasonable basis for:
(a)
any advice provided to or on behalf of a client;
(b)
any representations made in a certificate that it signs that will be reasonably
foreseeably relied upon by the client, any other party involved in the municipal securities
transaction or municipal financial product, or investors in the municipal entity client’s securities
or securities secured by payments from an obligated person client; and
(c)
any information provided to the client or other parties involved in the municipal
securities transaction in connection with the preparation of an official statement for any issue of
municipal securities as to which the municipal advisor is advising.
.02 Duty of Loyalty. Municipal advisors must fulfill a duty of loyalty in performing their
municipal advisory activities for municipal entity clients. The duty of loyalty includes, but is not
limited to, the obligations discussed in this paragraph .02. A municipal advisor must deal
honestly and with the utmost good faith with a municipal entity client and act in the client’s best
interests without regard to the financial or other interests of the municipal advisor. A municipal
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advisor must not engage in municipal advisory activities for a municipal entity client if it cannot
manage or mitigate its conflicts of interest in a manner that will permit it to act in the municipal
entity’s best interests.
.03 Action Independent of or Contrary to Advice. If a municipal entity or obligated person
client of a municipal advisor elects a course of action that is independent of or contrary to advice
provided by the municipal advisor, the municipal advisor is not required on that basis to
disengage from the municipal advisory relationship.
.04 Limitations on the Scope of the Engagement. Nothing contained in this rule shall be
construed to permit the municipal advisor to alter the standards of conduct or impose limitations
on any of the duties prescribed herein. If requested or expressly consented to by the municipal
entity or obligated person client, however, a municipal advisor may limit the scope of the
municipal advisory activities to be performed to certain specified activities or services. If the
municipal advisor engages in a course of conduct that is inconsistent with any such agreed upon
limitations, it may result in negating the effectiveness of such limitations.
.05 Conflicts of Interest. Disclosures of conflicts of interest by a municipal advisor to its
municipal entity or obligated person client must be sufficiently detailed to inform the client of
the nature, implications and potential consequences of each conflict. Such disclosures also must
include an explanation of how the municipal advisor addresses or intends to manage or mitigate
each conflict.
.06 Relationship Documentation. During the term of the municipal advisory relationship, the
writing(s) required by section (c) of this rule must be promptly amended or supplemented to
reflect any material changes or additions, and the amended writing(s) or supplement must be
promptly delivered to the client. This amendment and supplementation requirement applies to
any changes and additions that are discovered, or should have been discovered, based on the
exercise of reasonable diligence by the municipal advisor. The information described in
subsection (c)(ii) of this rule is not required if the municipal advisor previously fully complied
with the requirements of section (b) of this rule to disclose conflicts of interest and other
information and subsection (c)(ii) would not require the disclosure of any materially different
information than that previously disclosed to the client.
.07 Inadvertent Advice. A municipal advisor is not required to comply with sections (b) and (c)
of this rule if the municipal advisor meets all of the following requirements. In the event that a
municipal advisor inadvertently engages in municipal advisory activities for a municipal entity or
obligated person and does not intend to continue the municipal advisory activities or enter into a
municipal advisory relationship, the municipal advisor must, as promptly as possible after
discovery of the provision of inadvertent advice, provide a document to such municipal entity or
obligated person that is dated and includes:
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(a)
a disclaimer that the municipal advisor did not intend to provide advice and that,
effective immediately, it has ceased engaging in municipal advisory activities with respect to that
municipal entity or obligated person in regard to all transactions and municipal financial
products as to which advice was inadvertently provided;
(b)
a notification that such municipal entity or obligated person should be aware that
the disclosure of material conflicts of interest and other information required by section (b) of
this rule has not been provided;
(c)
an identification of all of the advice that was inadvertently provided, based on a
reasonable investigation; and
(d)
document.
a request that the municipal entity or obligated person acknowledge receipt of the
A municipal advisor utilizing this alternative must promptly conduct a review of its written
supervisory and compliance policies and procedures to ensure they are reasonably designed to
prevent the provision of inadvertent advice to municipal entities and obligated persons. The use
of this alternative has no effect on the applicability of any provisions of this rule other than
sections (b) and (c) or any other legal requirements applicable to municipal advisory activities.
.08 Applicability of State or Other Laws and Rules. Municipal advisors may be subject to
fiduciary or other duties under state or other laws. Nothing contained in this rule shall be deemed
to supersede any more restrictive provision of state or other laws applicable to municipal
advisory activities. In addition, the specific prohibition in subsection (e)(ii) of this rule shall not
apply to an acquisition as principal, either alone or as a participant in a syndicate or other similar
account formed for the purpose of purchasing, directly or indirectly, from an issuer all or any
portion of an issuance of municipal securities on the basis that the municipal advisor provided
advice as to the issuance because that is a type of transaction that is addressed and prohibited in
certain circumstances by Rule G-23.
.09 Suitability. A determination of whether a municipal securities transaction or municipal
financial product is suitable must be based on numerous factors, as applicable to the particular
type of client, including, but not limited to, the client’s financial situation and needs, objectives,
tax status, risk tolerance, liquidity needs, experience with municipal securities transactions or
municipal financial products generally or of the type and complexity being recommended,
financial capacity to withstand changes in market conditions during the term of the municipal
financial product or the period that municipal securities to be issued in the municipal securities
transaction are reasonably expected to be outstanding and any other material information known
by the municipal advisor about the client and the municipal securities transaction or municipal
financial product, after reasonable inquiry.
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.10 Know Your Client. A municipal advisor must use reasonable diligence, in regard to the
maintenance of the municipal advisory relationship, to know and retain the essential facts
concerning the client and concerning the authority of each person acting on behalf of such client.
The facts “essential” to “knowing a client” include those required to:
(a)
effectively service the municipal advisory relationship with the client;
(b)
act in accordance with any special directions from the client;
(c)
understand the authority of each person acting on behalf of the client; and
(d)
comply with applicable laws, regulations and rules.
.11 Excessive Compensation. Depending on the specific facts and circumstances of the
engagement, a municipal advisor’s compensation may be so disproportionate to the nature of the
municipal advisory activities performed as to constitute an unfair practice in violation of Rule
G-17. Among the factors relevant to whether a municipal advisor’s compensation is
disproportionate to the nature of the municipal advisory activities performed are the municipal
advisor’s expertise, the complexity of the municipal securities transaction or municipal financial
product, whether the fee is contingent upon the closing of the municipal securities transaction or
municipal financial product, the length of time spent on the engagement and whether the
municipal advisor is paying any other relevant costs related to the municipal securities
transaction or municipal financial product.
.12 529 College Savings Plans and Other Municipal Fund Securities. This rule applies
equally to municipal advisors to sponsors or trustees of 529 college savings plans and other
municipal fund securities. All references in this rule to an “official statement” include the plan
disclosure document for a 529 college savings plan and the investment circular or information
statement for a local government investment pool.
.13 Principal Transactions - Other Similar Financial Products. For purposes of subsection
(f)(ix) of this rule, which defines the term “principal transaction,” the phrase “other similar
financial product” includes a bank loan, but only if it is in an aggregate principal amount of
$1,000,000 or more and it is economically equivalent to the purchase of one or more municipal
securities.
.14 Principal Transactions - Exception for Transactions in Specified Fixed Income
Securities. Engaging in a principal transaction with a municipal entity client is not specifically
prohibited under subsection (e)(ii) of this rule if:
(a)
the municipal advisor is a broker-dealer registered under Section 15 of the Act,
and each account as to which the municipal advisor relies on this paragraph .14 is a brokerage
account subject to the Act, and the rules thereunder, and the rules of the self-regulatory
organization(s) of which it is a member, and is an account as to which the municipal advisor
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exercises no investment discretion (as defined in Section 3(a)(35) of the Act), except investment
discretion granted by a municipal entity client on a temporary or limited basis;
(b)
neither the municipal advisor, nor any affiliate of the municipal advisor, is
providing or has provided advice to the municipal entity client as to an issue of municipal
securities or a municipal financial product that is directly related to the principal transaction
(other than advice as to another principal transaction under circumstances meeting all the
requirements of this paragraph .14);
(c)
the principal transaction is a sale to or a purchase from the municipal entity client
of any U.S. Treasury security, agency debt security, or corporate debt security (as defined in
paragraph .15 of the Supplementary Material) and does not involve municipal escrow
investments (as defined in 17 CFR 240.15Ba1-1(h)); and
(d)
the municipal advisor either: (1) discloses to the municipal entity client in writing
before the completion of the transaction the capacity in which the municipal advisor is acting and
obtains the consent of the municipal entity client to such transaction or (2) executes the
transaction under circumstances meeting all of the following requirements:
(A) neither the municipal advisor nor any of its affiliates are the issuer of, or, at
the time of the sale, an underwriter (as defined in 17 CFR 240.15c2-12(f)(8)) of, the
security;
(B) the municipal entity client has executed a written, revocable consent
prospectively authorizing the municipal advisor directly or indirectly to act as principal
for its own account in selling any security to or purchasing any security from the
municipal entity client, so long as such written consent is obtained after written
disclosure to the municipal entity client explaining: the circumstances under which the
municipal advisor directly or indirectly may engage in principal transactions; the nature
and significance of conflicts with its municipal entity client’s interests as a result of the
transactions; and how the municipal advisor addresses those conflicts;
(C) the municipal advisor, prior to the execution of each principal transaction,
informs the municipal entity client, orally or in writing, of the capacity in which it may
act with respect to such transaction and obtains consent from the municipal entity client,
orally or in writing, to act as principal for its own account with respect to such
transaction;
(D) the municipal advisor sends a written confirmation at or before completion of
each such transaction that includes, in addition to the information required by 17 CFR
240.10b-10 or Rule G-15, a conspicuous, plain English statement informing the
municipal entity client that the municipal advisor disclosed to the client prior to the
execution of the transaction that the municipal advisor may be acting in a principal
capacity in connection with the transaction, the municipal entity client authorized the
transaction, and the municipal advisor sold the security to, or bought the security from,
the municipal entity client for its own account;
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(E) the municipal advisor sends to the municipal entity client, no less frequently
than annually, written disclosure containing a list of all transactions that were executed in
the client’s account in reliance upon subsection (d)(2) of this paragraph .14, and the date
and price of such transactions; and
(F) each written disclosure required by subsection (d)(2) of this paragraph .14
includes a conspicuous, plain English statement that the municipal entity client may
revoke the written consent referred to in paragraph (d)(2)(B) of this paragraph .14
without penalty at any time by written notice to the municipal advisor.
This paragraph .14 shall not be construed as relieving in any way a municipal advisor from
acting in the best interest of its municipal entity clients, nor shall it relieve the municipal advisor
from any obligation that may be imposed by other applicable provisions of the federal securities
laws and state law.
.15 Terms Relating to the Exception in Paragraph .14. For purposes of paragraph .14 and this
paragraph .15 of the Supplementary Material:
(a) “agency” means a U.S. executive agency as defined in 5 U.S.C. 105 that is authorized
to issue debt directly or through a related entity, such as a government corporation, or to
guarantee the repayment of principal and/or interest of a debt security issued by another entity.
The term excludes the U.S. Department of the Treasury in the exercise of its authority to issue
U.S. Treasury securities;
(b) “agency debt security” means a debt security (i) issued or guaranteed by an agency, or
(ii) issued or guaranteed by a government-sponsored enterprise, including a securitized product
that is issued by an agency or a government-sponsored enterprise, or, for which, the principal or
interest (or both) is guaranteed by an agency or a government-sponsored enterprise;
(c) “corporate debt security” means a debt security that is U.S. dollar-denominated and
issued by a U.S. or foreign private issuer and, if a “restricted security” as defined in 17 CFR
230.144(a)(3), sold pursuant to 17 CFR 230.144A, but does not include a money market
instrument;
(d) “government-sponsored enterprise” has the same meaning as defined in 2 U.S.C.
622(8);
(e) “money market instrument” means a debt security that at issuance has a maturity of
one calendar year or less, or, if a discount note issued by an agency or a government-sponsored
enterprise, a maturity of one calendar year and one day or less;
(f) “securitized product” means a security collateralized by any type of financial asset,
such as a loan, a lease, a mortgage, or a secured or unsecured receivable, and includes, but is not
limited to, an asset-backed security, a synthetic asset-backed security, and any residual tranche or
interest of any security specified above, which tranche or interest is considered a debt security;
and
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(g) “U.S. Treasury security” means a security issued by the U.S. Department of the
Treasury to fund the operations of the federal government or to retire such outstanding securities.
*****
Rule G-8: Books and Records to be Made by Brokers, Dealers, Municipal Securities
Dealers, and Municipal Advisors
(a) - (g) No change.
(h)
Municipal Advisor Records. Every municipal advisor that is registered or required to be
registered under Section 15B of the Act and the rules and regulations thereunder shall make and
keep current the following books and records:
(i)
No change.
(ii)
Reserved.
(iii)
Reserved.
(iv)
Records Concerning Duties of Non-Solicitor Municipal Advisors pursuant to Rule
G-42.
(A) A copy of any document created by a municipal advisor that was material to
its review of a recommendation by another party or that memorializes the basis for any
determination as to suitability.
(v)
No change.